Home loan rates could increase a touch

MID-TERM REVIEW OF ANNUAL POLICY 2004-05/ RETAIL IMPACT

The Reserve Bank of India has tightened the risk weightages on loans to the housing sector and on consumer credit, including both personal loans and credit cards. A higher risk weightage means banks will have to set apart a higher amount of capital for every rupee lent.

Analysts said the RBI move may not curb the burgeoning growth in the housing loan and consumer credit markets, but it will surely force the banks to be a bit more careful with unbridled expansion.

The central bank in the mid-term review of annual policy for 2004-05 has increased the risk weight for banks in the case of home loans from 50 per cent to 75 per cent.

In the case of consumer credit, including personal loans and credit cards, the risk weight has been raised from 100 per cent to 125 per cent.

Said the policy, "It is observed in the recent past that the growth of housing and consumer credit has been very strong. As a temporary counter-cyclical measure, it is proposed to put in place risk containment measures and increase the risk weight from 50 per cent to 75 per cent in the case of housing loans and from 100 per cent to 125 per cent in the case of consumer credit including personal loans and credit cards."

This is a temporary risk containment measure, the policy said. The RBI policy has also expressed concern about the quality of housing loans being disbursed. The tightening of risk norms comes in the wake of increased frauds, indiscriminate lending and rising delinquencies in housing loans, consumer loans and credit cards.

The raise in risk weightage could possibly lead to higher rates on home loans, personal loans and also on credit cards since banks now have to apportion higher amounts of capital each time these loans are disbursed. The rates in all three segments are ruling at their historic lows thanks to increased competition.

While the housing sector has been growing at 30 per cent per annum in recent years with the total housing loan market at Rs 50,000 crore as on March 2004, there are about 10 million credit cards in force and the personal loan market is fast growing.

The housing sector has been booming since the last 2-3 years as banks have turned their attention from corporate lending to retail loans. This higher risk weightage in housing could take away some of the sheen attached to this sector.

Home finance majors like HDFC will now have an advantage over banks since the increased risk weightage and apportioning of capital applies only to banks. Home finance firms which have traditionally been constrained with their higher fund cost may now have an advantage over banks.

In the consumer durables loan market, which finances individuals purchasing white goods such as fridges, TVs, microwaves, delinquency rates have doubled to as high as 10-15 per cent over the last 12 months.

Although bankers are cagey about their individual NPA numbers in specific loan segments many of them do admit the delinquency rates in the consumer loans and the credit card sectors are alarming.

Key takeaways

• Higher risk weightages on housing and consumer loans may force banks to hike rates.
• May tilt the balance from banks to pure home finance companies as latter is spared the burden.
• The apex bank says this is only a temporary risk-containment, counter-cyclical measure.